Morgan Stanley tops analysts’ estimates on trading revenue

Morgan Stanley posted earnings that beat analysts’ estimates as stock-trading revenue jumped and wealth-management profit margins climbed to a record. The firm’s shares rose after it announced a $500 million stock buyback.

Second-quarter net income rose 66% to $980 million, or 41 cents a share, from $591 million, or 29 cents, a year earlier, the New York-based company said today in a statement. Excluding accounting gains tied to the firm’s own debt and a charge related to buying the remaining stake in its brokerage joint venture, profit was 45 cents a share, topping the 43-cent average estimate of 26 analysts surveyed by Bloomberg.

Record brokerage revenue and an 18.5% pretax margin show progress toward the higher profitability targets Chief Executive Officer James Gorman laid out for the unit when Morgan Stanley bought the remaining stake in the venture last month. The firm also posted the highest equity-trading revenue among its peers for the first time in at least two years.

“The revenue beat was pretty much across the board, with investment banking, trading and commissions all doing a bit better than expected,” Chris Kotowski, an Oppenheimer & Co. analyst, wrote today in a report.

The firm said it would begin the stock-repurchase program after receiving no objections from the Federal Reserve. Chief Financial Officer Ruth Porat said in an interview that Morgan Stanley sought regulatory approval as part of the Fed’s annual stress test after it completed the brokerage purchase at the end of June.

Share Performance

The shares rose 3.7% to $27.53 at 9:54 a.m. in New York. While that’s the highest price since April 2011, it’s still 7% below the level at the end of 2009, when Gorman took over.

Gorman, 55, said in May that his firm can post a 10% return on equity, double that of 2012, by next year if regulators allow it to return a “reasonable” amount of capital to shareholders. ROE was 4.4% in the second quarter, down from 8% in the first quarter.

“We do see the update on the share buyback as a positive as capital return is an important leg of the ROE improvement story,” Fiona Swaffield, a Royal Bank of Canada analyst, wrote today in a note to investors. “While small, it is a positive step especially given some concerns over the impact of the new proposals on the supplementary leverage ratio.”